The world’s biggest copper producer, Freeport-McMoRan Copper & Gold Inc, has given the rest of the mining industry a big tip about what lies ahead this year and next, and it isn’t nice.
Lower prices, increased financial pressures and some realistic accounting. Something that the likes of Rio Tinto, Xstrata, CVRD and BHP Billiton will have to contend with.
BHP revealed this week that its copper division incurred a small loss, thanks to lower mining grades and higher costs at Escondida in Chile.
While the group reported better-than-expected quarterly results last week on higher sales volumes, weak metal prices have forced Freeport to cut projected copper and molybdenum sales targets for both 2009 and 2010.
Freeport lowered its forecasts for copper sales volumes by 9% to 3.9 billion pounds for 2009 and by 17% to 3.8 billion pounds for 2010. It sold 4.1 billion pounds of copper in 2008.
The company also cut its outlook for molybdenum production by much larger amounts: by 25% for 2009 and by 40% for 2010.
Freeport also recorded a loss after charges totalling $US13.9 billion (compared with a profit in 2007 of $US414 million) largely due to the reduction in the value of assets in the Phelps Dodge purchase.
It suspended its dividend in December and is cutting capital expenditure for 2009 from $US2.7 billion last year to around $US1.3 billion and even lower next year to around $US1 billion.
Global metals prices have plunged to the point where copper is now around $US1.50 a pound and has been down around $US1.30 on some days in the past couple of months.
Prices are around 60% lower since the middle of 2008 and there’s no way there will be any upturn soon.
World stocks of unsold metal are at high level on the London Metal Exchange. They were sitting around 439,400 tonnes yesterday. That’s more than 40% of Freeport’s 2008 sales of the metal.
The write-downs were mainly due to noncash charges, including write-downs of inventory values and goodwill from the acquisition of rival Phelps Dodge, the company said in its profit statement and commentary (Source).
Freeport had said it expected to write off a substantial amount of the $6 billion goodwill from the Phelps Dodge purchase as non-cash charges.
Chief executive Richard Adkerson told a conference call with analysts that the write-downs were required by accounting rules because the value of Freeport’s assets, such as mineral reserves, had declined with the slump in metal prices.
2008 revenue fell by 50% to $US2.07 billion from $US4.18 billion a year earlier as copper prices dropped from around $US4 per pound last July to around $US1.50 currently.
With a global major like Freeport hacking into the intangibles part of its balance sheet, the pressure will be on Rio Tinto in the first instance to slash the book value of its aluminium assets picked up in the $A44 billion Alcan deal in 2007.
The exercise now becomes one of how much, rather than will Rio cut.
BHP has already hacked $US4 billion or thereabouts from the balance sheet values of its mothballed Ravensthorpe nickel project in Western Australia and more write-downs seems inevitable for the associated processing facilities at Yabulu in North Queensland, and at the Olympic Dam project in South Australia which was bought in 2005 in the takeover of WMC Resources.
BHP paid $A9.2 billion, or $US7.3 billion for WMCR, mainly to get hold of Olympic Dam, which is a huge gold, copper and uranium deposit in South Australia.
BHP is delaying a decision on the huge second stage of Olympic Dam to around 2011 or later, it would seem from comments in the interim production report.
It has reversed a decision taken in the December 2007 quarter, to restart copper sulphide mining at Pinto Valley (USA) to take advantage of the market conditions at the time.
"This is a short life and high cost operation, and as such is uneconomic in the current environment. During February 2009 we will place the sulphide mining operation on care and maintenance," the company said last week.
The company also said last week that it will delay $US6.75 billion in projects at the Escondida copper mine in Chile in the wake of the metals slump.
BHP will postpone a desalination plant for Escondida, which would have cost $US3.5 billion. When it will be built it will have half the original planned size.
The company will also delay until 2011 a decision on a possible $US3.25 billion expansion of processing capacity at Escondida.
BHP last month delayed development of an energy plant to supply the mine and also postponed a project to increase output of molybdenum.
In October, BHP said it would decide this year on Phase Five, a project at Escondida to increase its capacity to crush and process rock and store waste by 2012.
Escondida requires more processing capacity as a drop in the quality of ore at the mine forces it to crush more rock to produce copper.
Of the 6,000 job cuts announced last week by BHP, about 2,000 were in Chile and already have been made.
BHP owns 57.5% of Escondida, Rio Tinto 30% and a group led by Mitsubishi Corp. owns 10%. International Finance Corp. owns the remainder.
BHP CEO, Marius Kloppers said this week that the company would be interested in Rio’s share of Escondida, if it came onto the market.
